3.3.1 Legal relationship

The first time the CJEU mentioned a legal relationship between parties as a requirement for a transaction to be subject to VAT was when it mentioned that taxable transactions presuppose the stipulation of a price or consideration.1 The CJEU later elaborates on this by stating that a supply is effected 'for consideration', and hence is taxable, “only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient”.2

The concept of ‘legal relationship’ is a concept of Union law, which does not necessarily coincide with the definition or concept of a legal agreement in the local rules and legislation in the EU Member States.3 Parties may agree to a specific transaction and perform the transaction, assuming that the transaction has a specific VAT treatment, for example based on local civil law or local interpretation of EU VAT rules, whereas from an EU VAT perspective the actual VAT treatment is different. Because VAT is levied based on EU rules and independent concepts of Union law, local civil (or other) legislation has no effect on the VAT treatment of a transaction.4

The agreement does not have to be in writing (e.g. a contract).5 However, in my view it must be clear from the facts and circumstances that this legal relationship or agreement exists.6 The agreement does not have to be enforceable by law either.7

I note here that even though contractual terms are important in categorising a transaction as a taxable transaction, it is necessary to bear in mind that consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT.8 Normally, the contractual position reflects the economic and commercial reality of a transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a transaction have to be identified. It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions. That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions. If the contractual terms do not genuinely reflect economic reality, those terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.9

The fact that an activity consists in the performance of duties conferred and regulated by law in the public interest is irrelevant for the purposes of determining whether that activity can be classified as a supply of services effected for consideration.10 Even where an activity is designed to fulfil a constitutional obligation exclusively and directly incumbent upon the Member State concerned, the direct link between the supply of services and the consideration received cannot be called into question by this fact alone.11 This means that a relationship based on law qualifies as a ‘legal relationship’ in the sense of EU VAT. I note that a ‘relationship’ requires rights and obligations for more than one party. There are also obligations imposed by law that are unilateral, such as the payment of taxes.12 However, this is still a legal relationship, as it is an obligation linking the tax debtor to the state.